What Does GMAC’s Bond-Exchange Failure Mean for Detroit?

The GMAC bond-exchange results are out, and the screws that GMAC applied on December 10 — tender your bonds or we won’t become a bank or get TARP funds — seem to have had some effect, with the percentage of bonds tendered rising from about 22% to 59%. But GMAC was very clear that anything short of 75% would constitute failure, so the first big attempt, in this crisis, to bail in bondholders outside of formal bankruptcy proceedings has clearly not worked.

This bodes ill for the future of Detroit, if the aim of management and the government is to avoid Chapter 11 bankruptcy proceedings. The companies can bluster all they like, but it’s hard to apply moral suasion to bondholders in the way that you can with banks (and the government did, during the Chrysler bailout of 1981).

I can see why GMAC took what it could get, and accepted the 59% of bonds which were tendered into the exchange. But now those bondholders look foolish, the other 41% look smart, and GMAC simply looks untrustworthy, willing to pick off creditors one by one if it can’t get them to work together.

Given these results, why would any GM or Chrysler bondholders tender into any exchange, given that the government has even more invested in the car companies than it did in GMAC? When, they might reasonably ask, was the last time that a state-owned company defaulted?

I suspect that one legacy of the failed GMAC exchange offer will be that some kind of pre-packaged bankruptcy is still in the cards for GM and Chrysler.

Or maybe there’s a corporate-finance way of doing essentially the same thing: a new shell company is created, owned mostly by the UAW, which buys most of the viable assets of GM and Chrysler while leaving the liabilities and failed marques behind for creditors to fight over. With a carefully-written piece of legislation, Congress could probably insulate the new company from angry bondholders saying that the transfer was illegal. The govenrment’s TARP funds would be wiped out, but I don’t think anybody seriously expects those monies to be paid back anyway.